The primary causes of the recent surge in our inflation rate are Covid-19, the Russian invasion of Ukraine, corporate greed (or good business decisions), and something no politician has mentioned: excessive government and private debt.
Debt doesn’t cause inflation. What does, is increasing a country’s supply of money faster than its supply of goods and services (products).
M2, the Federal Reserve Bank’s (FRB) measure of our money supply includes cash, checking deposits, and other deposits that can be quickly be converted to cash. However, M2 does not include available credit, which is just as spendable as cash and has a similar effect on prices.
On Chart 1, Total Credit Market Debt (TCMD) is the sum of our government and private debt, which has been growing faster than our GDP for over forty years.
The key takeaways from the chart are:
- Borrowing (TCMD) more than you’re earning (GDP) is not sustainable for individuals, companies, or countries. How long do you think you could maintain your standard-of-living if your debt and income looked like this?
- We have been on a fiscally irresponsible path for over forty years regardless of which political party controlled the White House, the House, or the Senate. The Republicans blame the Democrats, the Democrats blame the Republicans, and they are both right.
- Before Covid-19 hit us in 2020, we filled the gap between what we earned and what we spent with government and private borrowed dollars, plus money that was essentially printed by the FRB. This increased our TCMD from 163%GDP in 1980 to an all-time high of 382%GDP in 2020.
Fear of Covid-19 in 2020 and resulting lockdowns disrupted normal business processes all over the world. Shortages of products, materials, employees, and transportation capacity developed in global supply chains, causing sales, profits, jobs, and millions of paychecks to drop like rocks.
To hopefully disarm Covid-19, prevent an economic meltdown, and restore economic growth, the Trump and Biden administrations passed spending bills that created enormous budget deficits of $3,132 billion in 2020 (Trump) and $2,775 billion in 2021 (Biden). Most of the outlays were well-intended, but done in haste under difficult circumstances. Some waste would be expected in combatting Covid-19, but both administrations used the pandemic as an opportunity to reward cronies and try to buy votes.
When Covid-19 was finally under reasonable control in early 2021, eager consumers armed with ample supplies of savings, free government money, and cheap credit, charged into our struggling economy where much more demand than supply quickly raised prices on many products and services.
The next big boost to inflation was the Russian invasion of Ukraine in February 2022. The war drastically reduced supplies of oil, fuels, grains, fertilizer, and other essential products that increased the prices of almost everything everywhere.
And as soon as inflation became a hot topic on the evening news, many producers, distributors, and retailers used it as cover for raising their prices more than their costs. Some call it good business decisions; others call it greed.
Mark Zandi, the chief economist of Moody’s Analytics, estimated Covid-19 added 2.0%, the Ukraine war added 3.5%, and Biden’s spending added 0.1% to our underlying inflation rate of 2.3%.
Zandi’s numbers say Covid-19’s damage to our economy and the Ukraine war caused almost all of the increase in our inflation rate, not Biden’s American Rescue Plan. It also seems to me that anyone paying attention to what was happening in the world would reach the same conclusion without any complicated analysis.
Our money supply’s growth rate started increasing in 2008 because the Federal Reserve Bank was trying to “stimulate” our economy out of the Great Recession with borrowed funds and money created out of thin air.
The result was our money supply increased from 52%GDP in 2007 to 72%GDP in 2019.
Going into the 2020’s, we had all the ingredients for rapidly increasing inflation: a historically colossal money supply; hordes of eager-to-buy customers with plenty of cash and credit; shortages of many goods, services and employees; and vendors anxious to recover sales and profits lost during the Covid-19 lockdowns.
Table 1 and Chart 2 show those forces increased our annual monthly inflation rate from 1.2% in 2020 to 4.7% in 2021, and 8.0% in 2022. It appears inflation will decline in 2023, but many analysts think inflation will be difficult to stop.
Joe Biden didn’t develop Covid-19 in his garage, didn’t create the post-pandemic supply chain problems, didn’t ask the Russians to invade Ukraine, and didn’t tell
businesses to gouge their customers by raising their prices far more than their costs. And he also didn’t export inflation to other countries around the world.
In fact, Trump wins the prize for creating the largest budget deficit and increase in our money supply in 2020. So anyone who wants to blame Biden for inflation should first blame Trump, then Biden, and add the Federal Reserve Bank that increased our money supply and TCMD for decades in an attempt to strengthen our economy that didn’t produce significant results.
The data and historical record say the basic causes of our high inflation rate were the following:
- The rapid growth of our M2 money supply from 51.8%GDP in 2007 to 72.1%GDP in 2019 to try to recover from the Great Recession;
- Our government’s ineffective response to Covid-19 and the disruption of worldwide supply chains;
- The Russian invasion of Ukraine in 2022;
- The massive surge in government spending in 2020 and 2021 by Trump and by Biden to help our economy, businesses, and individuals recover from Covid-19.
The spending and huge budget deficits by Trump and Biden are apparently the proverbial straws that broke the camel’s back and started inflation. If the camel (our economy) wasn’t already buried under a mountain of private debt, government debt, and money when the straws landed, the increase in our inflation rate would have been smaller, but the problems of recovering from Covid-19, supply-chain shortages, and the Ukraine war would still send prices higher.